Fully Funded Pensions: State and Local Governments Should Immediately Budget for the Pension Costs of Pay Raises

摘要

Everyone knows that most state and local government pension plans are underfunded. For example, in 2016, the average state plan had just 71 percent of the assets needed to cover future payments to retirees. All in all, state pensions were underfunded by more than $1.4 trillion that year. Although a lot of ink has been spilled in coming up with explanations and excuses for that massive underfunding, the bottom line is that public employers have just not contributed enough to pay the pensions promised to employees. The actuarial model that most pension plans use just does not work. In particular, our research suggests that the model does a poor job of accounting for generous pay raises. Instead of requiring a public employer to immediately pay for the increased pension liability that results when an employee gets a generous pay raise, the model allows the employer to pay it off in installments over the following ten, twenty, or even thirty years-actuaries call it "amortization."